Marketplace system fees enhancing market share and participation

ABSTRACT

A method for use by buyers and sellers in the execution of trades. The price of each executed trade within the system is logged. Next, a trend line is derived from the logged trades. The trading fee for a particular trade is determined based on the difference between the trade&#39;s price and the trend line as well as the size of the trade. This fee is imposed upon the buyer if the price of the trade is below the trend line, or imposed upon the seller if the price of the trade is above the trend line. The market markers in each item are evaluated according to how narrow their spreads were at the time of each transaction, and receive periodic bonuses based on these evaluations. A “crisis fee” is imposed on trades in the system when particularly measured qualities exceed normal bounds.

To the extent permitted by law, this application claims priority fromand incorporates by reference from U.S. application Nos. 60/128,263(filed Apr. 8, 1999), 60/131,054 (filed Apr. 26, 1999), and 60/174,363(filed Jan. 4, 2000).

BACKGROUND

In recent years electronic transaction systems that are the functionalequivalent of some or all of the roles of the traditional marketplacehave become commercially important. Building upon and expanding theautomation of the voice-only telephone network, such systems are calledmarketplace systems. Marketplace systems, to varying degrees and indifferent ways, automate markets. Examples are to be found in thethousands of e-commerce web sites of the Internet, in many commodity andstock exchanges around the world, in the block trading of stocks byfinancial institutions, in financial markets of all kinds (the largestof which is the global foreign exchange market), in wholesale producemarkets, in cattle markets, in lumber markets (mills and wholesalers),in jewelry trading, markets for event tickets, airline reservations,book buying and numerous others. Other examples include systemssponsored by organizations or corporations that electronically link manyof their own business activities to their suppliers, to their customers,or to both, and may be shared among several organizations in anindustry.

In the generic description covering such diverse markets, it is usefulto use the term item to cover anything that is sought and/or provided ina market, including products, services, and information. Some marketscover only a single item but a more typical market carries hundreds,thousands, even potentially an unlimited number of different items.Furthermore although purchase and sale is the main function of manymarkets, many others are limited simply to supplying information onavailability of items, or to facilitate some part of the purchase andsale process. Although all of these markets may have some degree ofautomation, many are not fully automated, particularly the actualexecution of a transaction often requires some human interaction beyondpressing a button that consummates the transaction, such as a voiceconversation. Furthermore, it is not just purchase and sale that may bethe functional activity or activities of the system, but other functionssuch as renting and leasing, shipping and insuring, delivering andreceiving, tracking and reporting, borrowing and lending; losing,finding and returning, and similar transactions may be functions of amarket. We also use the term user of a marketplace system to cover anyperson or organization that participates in any of these activities. Two(occasionally more) users are involved as parties to each transaction.Each is a counterparty to the other(s). In some markets users arerestricted to members, to professionals in the activity of the market,or to other categories. In some cases almost anyone may be a user. Intraditional markets users were local. In today's marketplace systems,users can be anyplace in the world.

Markets and marketplace systems alike are owned and controlled by one ormore individuals, sponsors, organizations, agencies, governments, orassociations, called here the sponsors. Sponsors, acting themselves orthrough agents, assignees, or employees, here called managers, haveresponsibility for managing, upgrading, revising and operating themarket. Various agreements between sponsors and between sponsors andmanagers in a marketplace system assign responsibility for operating andmanagement functions, as well as provide for payments for services, formaintaining, upgrading, or modifying the system and operating it on anongoing basis.

This invention pertains to marketplaces which have rapid transactionrates in individual items, particularly financial markets, but also insome commercial and industrial markets. These markets often have tradersor brokers handling transaction negotiations for their organizations ortheir clients. Financial markets also usually have dealers and marketmakers. With the advent of e-commerce many markets are beginning to betotally automated. Customers and principals initiate and executetransactions through the Internet or intranets with no humanintermediaries. This development is putting pressure on the financialmarkets where dealers and market makers have played a central role. Evenif the roles of dealers and market makers become marginal, the dominantprincipals in many financial markets with a need to transact at rapidrates require in-house traders to handle their transaction volumes. Theymay also use brokers, whose services less active participants in thesemarkets require. To cover all of these cases, marketplaces which haverapid transaction rates in individual items can be distinguished by thepresence and role of traders.

Market makers are dealers who usually are prepared to both buy and selleach item they make a market in, in a range of sizes, and throughout thetrading day. When a customer asks for a quote on an item (withoutrevealing its own interests in the item) a good market maker in manymarkets gives a complete quote in size, including up to four numbers: abid price (and the size it is good for) and an ask price (and the sizeit is good for). The size is often implicit and the same for both sides.The difference between the bid and the ask, the spread, represents thegross profit per unit item that the dealer receives on a purchase and asale, assuming the quotes for both were the same. Other things beingequal, the dealer willing to furnish a valid quote with a smaller spreadand over a greater range of volumes, more reliably (with fewerexceptions because of difficult market conditions or for whateverreason) is a dealer who is providing a better, more efficient, and lowercost service than some other dealer whose quote has one or more of threefeatures(a) a larger spread, (b) for a smaller range of sizes, and (c)is available over a smaller portion of the trading day. The first dealernot only offers a better service than the second dealer but also helpsthe sponsors produce a more efficient marketplace system. The paymentmethods of the invention should and can be made to favor more efficientdealers. Not all persons or organizations seeking to buy or sell an itemin a marketplace use a dealer. Many dealers' customers are largefinancial institutions or financial branches of conglomerates whichthemselves also act as dealers and market makers with their own sets ofcustomers.

It is desired to provide a system in which fees are assessed in a waywhich promotes stability and minimizes interference in the system. It isalso desired to provide a system in which the imposition of fees isperformed in a way which is as “painless” as possible. It is furtherdesired to provide a system which evaluates the performance of marketmakers in an objective way. Finally, it is desired to provide a way toslow down and avert a “run” on a currency.

Older trading systems are described, for example, in the following USpatents: U.S. Pat. No. 6,035,289 Method and apparatus for electronictrading of carrier cargo capacity; U.S. Pat. No. 6,016,483 Method andapparatus for automated opening of options exchange; U.S. Pat. No.6,014,643 Interactive securities trading system; U.S. Pat. No. 6,014,627Credit management for electronic brokerage system; U.S. Pat. No.6,012,046 Crossing network utilizing satisfaction density profile withprice discovery features; U.S. Pat. No. 5,995,947 Interactive mortgageand loan information and real-time trading system; U.S. Pat. No.5,950,176 Computer-implemented securities trading system with a virtualspecialist function; U.S. Pat. No. 5,926,801 Electronic security/stocktrading system with voice synthesis response for indication oftransaction status; U.S. Pat. No. 5,924,083 Distributed matching systemfor displaying a book of credit filtered bids and offers; U.S. Pat. No.5,915,209 Bond trading system; U.S. Pat. No. 5,873,071 Computer methodand system for intermediated exchange of commodities; U.S. Pat. No.5,845,266 Crossing network utilizing satisfaction density profile withprice discovery features; U.S. Pat. No. 5,689,652 Crossing networkutilizing optimal mutual satisfaction density profile; U.S. Pat. No.5,630,127 Program storage device and computer program product formanaging an event driven management information system with rule-basedapplication structure stored in a relational database; U.S. Pat. No.5,454,104 Financial data event flow analysis system with study conductordisplay; U.S. Pat. No. 5,375,055 Credit management for electronicbrokerage system; U.S. Pat. No. 5,347,452 Method for providing a visualdisplay of current trading volume and cumulative average trading volumefor preselected time intervals; U.S. Pat. No. 5,305,200 Financialexchange system having automated recovery/rollback of unacknowledgedorders; U.S. Pat. No. 5,297,032 Securities trading workstation; U.S.Pat. No. 5,285,383 Method for carrying out transactions of goods usingelectronic title; U.S. Pat. No. 5,195,031 Trading system for providingreal time context sensitive trading messages based on conversationanalysis; U.S. Pat. No. 5,185,696 Financial calculator capable ofdisplaying graphic representation; U.S. Pat. No. 5,063,507 Goodsdatabase employing electronic title or documentary-type title; U.S. Pat.No. 4,903,201 Automated futures trading exchange; U.S. Pat. No.4,674,044 Automated securities trading system; U.S. Pat. No. 4,292,508Trading system; as well as U.S. Pat. Nos. 5,313,560, and 5,974,485.

Older trading systems are also described in the following PCTpublications: WO 00/16224 Communication of credit filtered prices in anelectronic brokerage system; WO 00/11588 Anti-manipulation method andsystem for a real-time computerized stock trading system; WO 00/11587 Areal-time computerized stock trading system; WO 99/26173 A configurableelectronic trading system and the method therefor; WO 99/19821 Systems,methods and computer program products for electronic trading offinancial instruments; WO 99/10815 Exchange method and apparatus; WO98/49639 Network computer trading system; WO 98/21667 System and methodfor trading having a principal market maker; WO 97/45802 Distributedmatching system for displaying a book of credit filtered bids andoffers; WO 97/30407 Universal contract exchange; WO 97/22072 Electronictrading system including an auto-arbitrage feature or name switchingfeature; WO 97/08640 Anonymous trading system within improved quoteinput capabilities; as well as WO 97/19427.

Principal references in this area are Henderson, H, Kay, A. F.,Introducing Competition to Global Currency Markets, Futures 28(4):305-24and Kay, A. F., Henderson, H, Futures 31 (1999) 759-777. Otherreferences are Australian Financial Review, Henderson's the BreakingPoint, p. 1-9, Dec. 4, 1998; BBC Online Network, London, UK Oct. 30,1998; US Treasury Press release, Declaration of G-7 Finance Ministersand Central Bank Governors, Oct. 30, 1998; Greenspan, A., The Structureof the International Financial System. Annual meeting of the SecuritiesIndustry, Boca Raton, Fla., Nov. 5, 1998; The Economist, Jan. 23, 1999,p. 69, Argentina; Building, a Win Win World, Berrett Koehler, SanFrancisco (1996, 1997); The Economist, When countries go bust, Oct. 3;1998, p. 88; Business Week, Jan. 25, 1999, p. 126; Henderson, H,Building a Win Win World, Ch. 9. Information; The World's new CurrencyIsn't Scarce, Berrett Koehler, San Francisco (1996, 1997); UI Haq M,Kaul I. Grunberg I, editors, The Tobin Tax; Coping with FinancialVolatility, London; Oxford University Press, 1996; Soete L, Weel B.Cybertax, Futures 1999:309; 853-71; The Economist, Global Capitalism;Making it Work; Invited essay by Jeffrey Sachs, Sep. 12, 1998 23-5;Business Week, Feb. 8, 1999, pp. 64-77; The Economist, Global Financesection, Jan. 30, 1999; Challenge to the South, South Commission, OxfordUniversity Press (1990); Soros, C, The crisis of global capitalism, NewYork, Public Affairs, 1998; The Economist, Oct. 10, 1998, p. 18;Eichengreen B, Toward a New International Financial Architecture,Institute for International Economics, Washington, D.C., 1999.

SUMMARY OF INVENTION

What is disclosed is a method for use by buyers and sellers in theexecution of trades, each trade defining a respective price. In thismethod, prices of trades executed within the system are logged and atrend line is derived therefrom. A trading fee for a particular trade isdetermined, the fee imposed upon the buyer in the event the respectiveprice is below the trend line, the fee imposed upon the seller in theevent the respective price is above the trend line. The amount of thefee is functionally related to the difference between the respectiveprice and the trend line. Preferably the fee is in a monotonicincreasing relationship with the magnitude of the difference, and is ina monotonically increasing relationship with the size of the particulartrade, but the latter may be very slowly increasing (e.g.logarithmically). (The relationship might be generally increasing ormight be substantially monotonic.) In systems where there are marketmakers, the market makers in each item are evaluated according to hownarrow their spreads were at the time of each transaction. Authorizedmarket makes, under agreement with sponsors, receive periodic bonusesbased on these evaluations in comparison with all others authorized tomake markets in the same item and in the same size range during theperiod. A “crisis fee” is imposed oil trades in the system whenparticularly measured qualities exceed normal bounds. The system may beestablished it the foreign exchange market for the central bank in afirst country and extended to central banks of other countries.

DESCRIPTION OF THE DRAWING

FIGS. 1 and 2 are scattergrams showing derivation of typical trendlines;

FIG. 3 shows the organization of suppliers, customers and otherparticipants in a trading system; and

FIGS. 4 through 11 show actual time-series data for trading on aparticular day, with moving average curves shown in FIGS. 4 and 5, andbest-fitting curves of increasing polynomial order shown in FIGS. 6through 11.

FIG. 12 is a functional block diagram for a system according to theinvention.

FIGS. 13-18 are flow charts.

FIG. 12 shows schematically the trading system encompassed by claims 1through 9 and 10 through 18.

FIG. 13 shows schematically the market maker evaluation systemencompassed by claims 19 through 21.

FIG. 14 shows schematically the currency system encompassed by claim 22.

FIG. 15 shows schematically the country currency-trading systemencompassed by claims 23 through 25.

FIG. 16 shows schematically the market maker ranking system encompassedby claims 26 and 27.

DETAILED DESCRIPTION

A trading system (FIG. 3) serves as the marketplace for one or moreorganizations in a generally competitive industry that, by the use ofoutput from suppliers and other industry-need-servicers, produces forindustry customers products, services and/or data (or other marketableinformation) and generates orders to suppliers,

-   which system is owned or controlled by a sponsor or sponsors and    links system users (industry organizations, suppliers, and/or    customers) with each other in a communication network for the    purpose of executing or assisting in the advertising of needs and    interests, and/or the consummation, notification, settlement, and    distribution of transaction-related information/data between users,-   which users may also include organizations which service all or many    producers in the industry, organizations such as providers of    specialized trade newsletters, journals, magazines, conventions,    insurance, and shipping, and may also include industry trade    associations that set standards, codes of conduct, dispute    resolution procedures, and generally have oversight of the industry    or portions of it, and government agencies, which may regulate the    industry,-   which system consists of one or more central computers linked to    terminals located in user offices or premises via the communication    network consisting of various transmission means, such as satellite,    telephone, cable, radio, and optical, for the distribution of the    information carried by the system to and from users, which    information is often called data when processed or stored in the    central computers and messages when carried on the network and which    distribution is sometimes augmented by other computers (controllers,    multiplexers, servers, etc.) which are included in the network to    increase the allowed number of users, and/or the speed and capacity    of message distribution of the data, and which central computers and    terminals are considered as nodes of the network,-   which terminals can be personal computers (pc's), other computers,    and/or telephones and can include TV monitors, keyboards, printers,    and other data storage, input, and retrieval devices,-   which transactions are generally thought of as buying and selling    but can include, but are not limited to, brokering, renting,    borrowing, bartering, financing, lending, shipping, insuring,    credit-checking and extending, appraising, grading, tracking and    verifying, losing/finding and returning, receiving and accepting    selected (or all) of the individual items produced by the industry,    which items include products, services or data,-   which system also permits users to see the quotations of others    essentially instantaneously, including the best bids and offers    available in all items traded by the system and an instantaneous    “ticker” of latest transaction prices in all items,-   which system also may acknowledge, confirm, reconcile, settle,    process, store and retrieve ancillary materials associated with    transactions such as confirmations, invoices, bills, payments, and    various analyses and summaries of data generated by transactions    over various time periods, which analyses and summaries may be of    interest either to a single user, many users, the media, and/or the    general public,-   which users transact (buy/sell/etc.) fungible (or pseudo-fungible)    items at high speed and usually employ or have as agents traders or    others to enter into the system orders, indications, or similar    messages that initiate, negotiate, execute, and/or consummate    transactions, while allowing for instances where executions in part    take place by telephone communications between users or by other    means not part of the system,-   where pseudo-fungible items are items which need a large number of    parameters or specifications to make it possible for both sides to    agree on a transaction, but all of which parameters and    specifications may be referenced by a relatively short label,    reference numbers, icons, or other description of the item or by    conformance to an industry-accepted standard so referenced with the    result that, one way or another, a quick and satisfactory    transaction may be consummated.

FIG. 12 is a functional block diagram for a system according to theinvention. The system includes apparatus 110 logging prices of tradesexecuted within the system; apparatus 111 deriving a trend line fromsaid logged prices; and apparatus 112 determining a trading fee for aparticular trade.

FIG. 13 is a flow chart. Shown are a step 120 of logging prices oftrades executed within the system; a step 121 of deriving a trend linefrom said logged prices; and a step 122 of determining a trading fee fora particular trade.

FIG. 14 is a flow chart. Shown are a step 150 of logging prices oftrades executed within the system; a step 151 in which, for eachparticular trade having an actual price and for which the market makeris contemporaneously offering a bid/ask price, the respective differencebetween the price offered by the market maker for the trade and theactual price is noted; a step 152 of summing the magnitudes of therespective differences a sum; and a step 153 of imposing a penalty uponthe market maker as a function of the summed magnitudes.

FIG. 15 is a flow chart. Shown are a step 130 of logging the gross valueof transactions for the particular currency in a time segment; a step131 of deriving a trend slope for transactions for the particularcurrency in a time segment; and a step 132 of imposing a fee upontraders who are selling the particular currency and thus are buying acurrency that is not the particular currency.

FIG. 16 is a flow chart. Shown are a step 140 of establishing thecurrency trading system within the first country, a step 141 of loggingprices of trades executed within the system; a step 142 of deriving atrend line from said logged prices; a step 143 of determining a tradingfee for a particular trade; and a step 144 of establishing within asecond country a trading node of the currency trading system; and a step145 of sharing with the second country the trading fee.

FIG. 17 is a flow chart. Shown are a step 160 of logging prices oftrades executed within the system; a step 161 in which, for eachparticular trade having an actual price and for which the market makersare contemporaneously offering prices, the rankings of the market makersaccording to each respective difference between the price offered byrespective ones of the market makers for the trade and the actual priceare noted; and a step 162 of aggregating the rankings.

FIG. 18 is a flow chart. Shown are a step 170 of logging prices oftrades executed within the system; a step 171 in which, for eachparticular trade having an actual price and for which the market makersare contemporaneously offering prices, the positions of the marketmakers according to each respective difference between the price offeredby respective ones of the market makers for the trade and the actualprice are noted; and a step 172 of assigning penalties to respectivemarket makers as a function of the positions of the respective marketmakers.

This invention pertains to marketplace systems which include one or morecomputers acting as central processors and/or servers, and terminals,such as personal computers, located in user's offices or otherconvenient remote locations, all linked together by one or more highdata-rate electronic and/or optical networks. Terminals typicallyinclude screen monitors, printers, and other devices now commonlyassociated with personal computers. In the modern world, such systemscan very efficiently and cost-effectively handle a huge load oftransactions, thousands of users, and whatever processing load requiredthat only a few years ago might have been thought impossibly large.

The invention applies to all such systems and consists of a set ofrules, algorithms, and procedures, many embedded in software andhardware, others under which the market itself is operated by itssponsors and managers, as will be explained. The invention is itself asystem that provides advantages for existing marketplace systems or forde novo systems built to take maximum advantage of the invention.Sponsors have complete control of how the advantages are allocatedbetween themselves and the users. Fees may be adjusted by caps andminimums. Billed amounts may be adjusted with discounts or premiumsdepending on the type of user and/or with volume discounts figured in avariety of ways.

As will be seen, the invention is particularly useful and beneficial formarkets where there are a large number of similar transactions over atime period of a day or so for each item traded on the market. In thiscase the parties are typically represented by professionals, calledtraders. Items are best identified by relatively short descriptions sothat parties to the transaction readily know quickly and exactly what isbeing transacted and all governing terms and conditions. Descriptionsmay reference, implicitly or explicitly, standards and specificationswhich have no limit to their complexity as well as photos, videos, etc.

In the system according to this invention, transactions made through thesystem must be reported to the system, preferably by both parties.Alternatively, the execution of the transaction may take place on thesystem itself as soon as the parties agree on (1) the item, (2) usuallyalso unit price and quantity and (3) sometimes terms of delivery andsettlement, and other details. Some information on the item may beimplicit or covered by the rules of the marketplace. If a purchase andsale, the item can be an option, a future transaction, a forwardtransaction, a barter transaction (or swap), or have other conditionalterms depending on future events, such as a well-known market indexreaching a certain value.

In particular, the invention relates to how the payments made by usersto sponsors for the use of the system are determined. Such paymentscould be used in any of the following ways:

-   -   covering the costs of operation and maintenance of the system,    -   profiting the sponsors,    -   covering the costs of emergencies and outages,    -   financing system upgrade, enlargement and extension,    -   building surplus for unspecified purposes,        and for other purposes appropriate for a particular market but        differing from market to market, such as    -   providing for educational, charitable, eleemosynary or other        public purposes,    -   insuring or protecting one or more classes of users or sponsors        who may put up risk capital or otherwise be financially exposed        and whose presence and services to the market make it work        efficiently, smoothly, and without undue fluctuations in price        or activity that distorts the market or is unfair to many users.

In this invention some or all of the payments made for such purposescome from transaction fees, calculated by the system and charged to eachparty to a transaction. A key concept of the invention is that the feescharged automatically to the two parties of a transaction are generally(1) different and (2) small. If, aside from the fee, the transactingparties agree to a certain price, the presence of the fee will seldom ifever result in a party backing away from a transaction. It is true thatfees will generally be very small compared to other transaction costs oressentially negligible, but provisions are included so that both partieswill willingly proceed even when that is not the case, because thebenefits provided by other features of the system are more important tothem.

Fees are of several types, accumulated transaction by transaction,considered separately and then combined according to the market's rulesfor allocating charges between different fee types. Users are regularlybilled for total fee charges from time to time, like monthly.

Purpose Fees

The first fee type is a fee depending on the purpose of the transaction.This capability is included in the invention to accommodate to thesituation where the sponsors believe that user fees should depend on thepurpose of the transaction, which is often different betweencounterparties. User purposes serve as a non-trivial example in the FXor foreign exchange market listed in Table 1. Each user indicatestransaction purpose at the time of consummating a transaction. It isanticipated that most users will participate by means of traders forwhom speed and ease of use will be essential. A single key stroke may(1) indicate purpose according to a sponsors Purpose Code table and atthe same time, if desired, (2) cause the execution of the trade.Sponsors may occasionally change purpose codes, but should do thisrarely since it requires all traders to switch to new codes which may bedifficult in a very large market.

TABLE 1 Categories of Transactions by Purpose (example for FX)Transactions are executed in order to facilitate, make payments toward,or arrange for the following 1. international delivery of all legalgoods, services, and software (including cyber services). 2. directinvestments in or acquisition of foreign, non-financial assets,operating companies and properties. 3. international travel. 4. (withrespect to the portfolio of a resident/citizen of a country initiallylargely holding assets denominated in the currency of the countryincluding the currency itself) seeking to obtain more diversifiedholdings and to achieve a reasonable portfolio balance. 5. gift orcontribution to individual/organization/charity. 6. personal or businessloan, carrying no investment-features. 7. portfolio investments inforeign financial assets or financial companies. 8. (wholesale andretail) broker/dealer distribution function, efficiently placingportions of a relatively large amount of a currency originating from atransaction into the hands of many different parties who desirerelatively small amounts. 9. hedging balancing a portfolio as in (4)except that in this case the portfolio is not one being managed for, oron behalf of, a resident/citizen. 10. arbitrage (true) one or moretrades that when executed simultaneously can produce a profit for thearbitrageur, the profit arising from the variation of bid/offer pricesavailable at the same time on different exchanges/regional markets. 11.arbitrage (speculative) same as (10) except that one or more of thebid/offer prices is known only speculatively while the remainingquote(s) is/are known to be real. 12. (pure speculation) an execution bya party to a trade based on the party's belief that coupled with othertransaction(s), the transaction will produce a profit or reduce a loss,with the key proviso that this category covers only cases not coveredunder previous categories. Trades outside these 12 purposes orundisclosed can be assumed to be for tax-avoidance, money laundering, orother illegal purposes.

The size of this fee can be determined independent from other fees as amatrix of specific fees for trades of specific purposes and specificsizes, or may be incorporated as part of the market timing and crisisfee calculation as illustrated in the next section.

Market Timing Fees

The second fee type is a new concept, a fee for market timing. Such afee would have been impractical before two recent technologicaldevelopments, the vast increase in network bandwidth and the greatcompression of processing time. Furthermore, such a fee was notimportant in many markets before achieving high trading volume and speedbecame extremely important. This fee is only appropriate if there aremany transactions in a single item over a relatively short time period,like an hour, day or week. This fee is computed by different formulas insuccessive time intervals, called time segments. As soon as a segmentends the next one begins. The end of a segment may be determined by anyof several different choices of segment determination, such as:

-   -   (a) clock-related, like every hour, day or week;    -   (b) trading volume-related, when a certain amount of trading has        executed in an item since the beginning of the segment;    -   (c) mixed, e.g., same as (b) except that if a minimum number of        trades have not taken place, the segment end is delayed until        the minimum number has been reached or a clock-related        additional time period elapses, or a combination of the two; or    -   (d) the boundary between two adjacent segments is adjusted to        improve the fit of the best-fitting curve over the total time        interval of the adjacent segments.

FIGS. 1 and 2 show two examples of a price-versus-time scatter diagramof points, whose ordinate is the reported unit price expressed as apercent of a reference price (such as the unit price of the first tradeof the segment), and whose abscissa is the reported time of execution.The total value or amount of a transaction is the unit price multipliedby the size (also sometimes called “volume”). The activity in each itemproduces a different diagram, and different items may have differenttime segments. There is a point on a scatter diagram for every tradereported in the item during the time interval covered by the diagram(which may be more than or less than a segment). Such diagrams normallyshow a scatter of points around a price trend line for a period of timeafter which the trend may change. FIG. 1 is an example for a period oftime T. At any given point in time, when that is the current time, noone knows for sure how the trend line may shift over the whole segment,when the segment ends.

The plane of the scatter diagram is the (t,r) plane; t (for time) versusr (for ratio of unit price to reference price). A formula for the trendline as the straight line best-fitting all the data points is developedbelow. FIGS. 1 and 2 are examples of two scatter diagrams for the sameitem and the same day. They show the same single trend line for the timeinterval from t=0 to t=T. FIG. 2 shows a new trend line beginning at t=Tand following through to the end of day. Larger trades, representing agreater size, should to some degree be weighted to have a greater effecton the location of the best fitting trend line. The weighting, w, shouldbe a function only of r, expressed as w(r) and could be the actualamount A(r) in dollars or other currency or standard of value, i.e.,W(r)=A(r). It is usually best not to have the weighting equal to thevolume of the transaction because of the importance provided by a volumediscount in many markets as well as the desirability of higherweightings for very small trades to avoid de minimus fee distinctions. Asimple arrangement, called the sponsors Size Weighting Table, mayprovide for weightings versus size of trade. See Table 2 for an exampleof such a table, where the weighting grows roughly logarithmically withsize. This arrangement might be appropriate for a market, like theforeign exchange market, where size ranges over five orders of magnitudeor more. For example if the size of a transaction were $150 million,according to Table 1, the weighting would be $17,450; a large number,but equal only to 0.01163% of the amount of the transaction. It isimportant to note that the weightings are not the fees and, depending onthe parameters chosen for calculating the fees, may have little to dowith the fees.

TABLE 2 Example of Volume Weighting Determining Best-Fitting Lines(Curves) Portion of Weighting as Examples. Weight Dollar Amount of Tradea percent of of Trades at (Higher # is “breakpoint”) size BreakpointsFirst $10,000  1.0% $100 but not less than $1 Next $10,000 and $100,000 0.5% $550 Next $100,000 and $1  0.1% $1,450 million Next $1 million to$10  0.05% $5,950 million Next $10 million to $100  0.01% $14,950million Next $100 million to $1 0.005% $59,950 Billion Part over $1Billion 0.001%

The weightings, whatever they may be, are determined automatically bythe system computer(s) from the weightings formula or table, as the casemay be, and fed into the best-fitting trend-line formula as describedbelow. Within time segments established by one of the methods describedabove, the best fitting line can be used to determine the market timingfee. For this purpose the sponsor chooses a formula for assigning feesdepending on departure from the best-fitting line, measured verticallyalong the ordinate (see FIG. 1 or 2), of each transaction from thebest-fitting line. In this case the best formula will be provided by atable, a sample of which is shown in Table 3, since the fees riseincrementally by amounts so small that the users generally consider eachincrement negligible compared to other transaction costs and negligiblecompared to the improvement in price the buyer or seller receives formarket timing.

Despite the advantages mentioned above, in some markets (1) an averageof the transaction prices in a segment or (2) a moving average may bemore acceptable because either of these options is simpler and morefamiliar to user. In the moving average case (2), time segments may bedifferently defined. A time segment begins N trades back and ends aftereach transaction, where N is a parameter which may be determined asempirically reasonable. In this case the trader, unlike the situation inthe preferred methods of the preceding paragraph, can calculate the feebefore committing to the transaction. When the fee gets significant, asin the case of the “crisis” fee, which may be in the range 0.5% to 2% orhigher, the trader should be informed of the size of the fee beforecommitting to a transaction. Examples of such segments for 500sequential yen-dollar exchanges with values of N of 50 and 25 are shownas FIGS. 4 and 5, respectively.

As an example of how Table 3 can be used, suppose the transaction takesplace at a unit price exactly 0.5% above the trend line. Then, comparedto the situation where the price would be exactly on the trend line, theseller did better financially than the buyer by exactly one percent. Theseller is required to pay a fee to the system of 0.01%, which is itselfvery small, only one percent of the seller's benefit from fortuitousmarket timing. We use the word fortuitous recognizing that it ispossible that the benefit may in some cases be legitimately credited tosuperior market intelligence, insights, intuition, or market power. Thesponsor(s) will be provided with an option between two treatments ofthis fee: (1) illustrated in table 3, the system sponsor, not theuncharged counterparties, receives the fee, and (2) the system sponsordoes not receive the fee, the uncharged counterparties do. In case (1)sponsors' revenue is increased and in case (2) sponsors receive noincrease in revenue, but system stability and user good will are greatlyincreased, so that sponsor market share will be maintained or increased.Sponsors must choose wisely between these two courses of action. Thesystem may go on line with one choice and switch to the other later. Theoption design must take into account that switching may occur rarely ornever, but still should be a simple matter.

TABLE 3 Sample Market Timing Fee Table Fees, expressed as a percent oftransaction value Percent transaction is below (above) Trend line (orcurve) If below If above Buyer Seller Buyer Seller Less than 0.5% A basecharge for each transaction: e.g. for both buyer and seller the greaterof .001% or $10 0.5% to 1.0% .01% 0 0 .01% 1.0% to 1.5% .02% 0 0 .02%1.5% to 2.0% .03% 0 0 .03% 2.0% to 2.5% .04% 0 0 .04% Etc.

The base charge in this example is a fixed minimum, 0.001%, even smallerthan the smallest increment of 0.01%, with an absolute minimum of $10and is charged the same to both buyer and seller, as the basiccost/value of participating on a system which is paid for by transactionfees and charged by the transaction. Aside from the minimal base charge,these additional fees for a market timing benefit is between onehundredth and one two hundredth the size of the benefit.

Use of the best-fitting trend line as the standard for determining abenefit for market timing, rather than a fixed reference (such as theopening or closing price, or an average or moving average of prices) isbased on the concept that fees should not prejudice or affect markettrends in any way. The market should move in response to buying andselling interests as a free market. Price movements in an ideal freemarket are there to adjust supply and demand, to send honest,undistorted signals to the users.

To make the timing fee work as well as it should, it will be necessarythat the method of determining the best-fitting trend-line should beimpressive to the naked eye, since price/time scatter diagrams will begenerated for a large variety of items over many days of trading andunder many different market conditions, with the purported best-fittingcurves plainly visible. FIG. 6 illustrates how the best-fitting trendline can appear to the eye to fit the data of FIG. 4 quite well. Anydiscrepancy that appears to be unfair and inaccurate will be readilyspotted and could cause dissatisfaction and loss of user support. Thiseffect will be ameliorated by capping this fee at a small percentage ofthe benefit, like 1 or 2 percent.

Traders will generally enjoy paying these fees for psychologicalreasons. The effect is expected to be similar to that experienced by aperson who has had a piece of good fortune and enjoys treating friendsto food and drink to share the happy moment. With this analogy in mind,one can speculate that the cap may actually be made much higher than 2%of the benefit, say 10%, without diminishing this big spender (“thedrinks are on me—let's celebrate”) effect. While a high fee will producemuch more revenue for the system, it would also work toward aiding somealternative marketplace to cut into the high market share of the systemsponsor(s) and, though tempting, should be avoided because of theimportance of market share for e-commerce markets.

In the case of the fortuitous market timing fee in the FX market,whenever the transaction is the consummation of commitments made at anearlier date, such as by the use of futures, forwards, and/or options,the fee must be adjusted for the difference in short term interest ratesprevailing at the earlier date as they apply to the two currencies whichare being exchanged in the transaction. This difference maysubstantially reduce or increase the benefit of the beneficiary (andhence the fee charged) and indeed may turn the counterparty into abeneficiary and subject to the fee.

The intention of the invention is to have fees affect the market aslittle as possible. Very small fees, charged against those who havebenefitted most from fortuitous tinting is an important way to do this.But that is not all that can be done with this approach. Up to thispoint, we have considered the standard by which fortuitous timing ismeasured to be a sequence of best-fitting straight line segments,independently determined in each time segment as determined from thechoices of FIG. 2 or otherwise. At the juncture of two time segments(the end of one and the beginning of the next) the best-fitting lines ofthe two segments do not necessarily connect (see FIG. 2). Under hecticmarket conditions the values of r of these two adjacent segments may bequite far apart at the point in time where the segments meet. It ispossible to replace the disjointed line segments by a smooth curve thatimproves the fit to the points of the scatter diagram and lowers somefees at times when the trend line segments are most disjointed. FIGS.7-11 show trend curves (calculated as best-fitting polynomials ofvarying degrees) with even slightly better fit, but these examples maynot handle the case of price trend reversal (up-to-down or down-to-up)such as illustrated in FIG. 2. The section, “Mathematical Techniques,”explains how to do this. In one promising case, the straight linesegments alternate with tangential best-fitting parabolic arcs so thatboth the segments are continuous and smooth (i.e., the derivative, inthe mathematical sense of that word, is continuous). Other methods,discussed in “Mathematical Techniques” are also possible and can bereadily programmed, as they appear promising.

Table 5 illustrates how purpose, either as a premium or discount, may befactored into the total fee charge with three purposes illustratedgenerically as: 1 favored, 2 standard, 3 discouraged. In the standardcase 2, the transaction fee can be calculated from tables such as shownin Tables 3 and 4, unchanged because of the standard purpose. If thesame trade were for a favored purpose, the fee would be cut in half andfor a discouraged purpose, it would be doubled. The sponsors are ofcourse free to make their own tables with specific purposes and feefactors at any levels they choose, larger or smaller.

In some markets, the percentage fees of the sponsor's Market Timing FeeTable may need to be adjusted for transaction size. One method for doingthat is to have a table such as the one shown in Table 3 apply to tradesup to a standard size, for example up to a $1 million trade, and afurther table, the Market Timing Fee Table for large trades (over $1million), such as Table 4. Note that in view of the possible usefulnessand fairness of a smooth curve rather than disjointed line segments,Tables 2 and 3 use the term “curve” rather than “line”. Thus, hereinwhen the term “trend line” is used, it preferably embraces trend curves.

TABLE 4 Market Timing Fees for Large Trades For each 0.5%¹ away from²the best-fitting trend curve at the time of trade the fee for largetrades can be determined from the percentages in the second column Sizeof Trade Portion toward fee First million  .01%. up to $100 Next $1million to $10 million  .005%. up to $450 Next $10 million to $100million  .001%. up to $900 Next $100 million to $1 Billion .0005%. up to$4500 Over $1 Billion .0001% ¹beyond the first 0.5% ²below the curve(for buyer's fee) and above the curve (for seller's fee)

As an example of using Table 4, suppose a $500 million trade is executedat a price 2.5% above the trend curve. In this case the seller pays afee of $13,800.

The dependence of this fee and other fees upon purpose could besimilarly calculated from Table 5.

Fee scales are chosen, as in Table 3 and Table 4, so that this fee,though occasionally much larger than the base-fee, also remains smallenough to be unnoticed or insignificant. Scales should generally becapped at low values such as 1 or 2 percent so that this fee is not morethan a small percentage of the benefit.

TABLE 5 Sample of Table for Calculating the Effect of Purpose CodePurpose Fee factor 1. (A favored purpose) 0.5 2. (A standard purpose)1.0 3. (A discouraged purpose) 2.0

A key idea for this method of determining market timing fees is that themarket cannot know the amount of the fee until after the time segmentends for which the best fitting curve is calculated. All that users knowis that the fees will be small and reasonable and negligible in the bigpicture. This will minimize the possibility of the potential fee havingany effect on what trades will execute and at what prices. The potentialfor traders playing games with these variable fees is essentiallynon-existent.

Mathematical techniques for defining price trends to closely track realtransaction scatter diagrams. In this section, we give precisemathematical formulas for determining the best fitting line from anyprice ratio sequence. These trend lines can be determined with today'scomputers virtually instantaneously. We also explore the feasibility ofapproximating these scatter diagrams by higher order polynomial curvesto allow for the fact that from time to time in every market, trendschange and so trend lines change. There is little wrong withapproximating any scatter diagram by a series of straight line segmentsforming a “broken curve”. However, following a given trend line that isabout to change, before a clear new trend emerges, there may be manypoints that form almost no trend. After the fact, when the new trend isclear, there seem to be clear advantages to approximating a region wherethe trend is not clear with a best fitting parabola. This idea offollowing trends by a smooth (differentiable) curve consisting ofalternating straight line segments and parabolic segments, turns out tobe quite attractive.

The Best-fitting Line. In traditional plane geometry notation, let theCartesian coordinates of N points be (t_(n),r_(n)), n=1,2, . . . , N.The nth point represents a trade at time t_(n) at a ratio of pricesr_(n) (price of the item in a given currency, say dollars, compared to areference price, such as the price at the beginning of a time segment):

In the case of FXr _(n) =B _(n) /A _(n),where B_(n) is the amount of one currency to be exchanged for A_(n) theamount of the second currency, or more generally where two parties havecontractually agreed to abide by the terms of an instrument according towhich the first party at time t_(n) obtains, or accepts an amount B_(n)of currency B (or some other consideration valued at B_(n) in currencyB) in exchange for transferring (or giving) at the same time (t_(n)) tothe second party some amount A_(n) of currency A or some otherconsideration valued at amount A_(n) in currency A at time t_(n).

Let the axes of the plane be as follows: horizontal or abscissa, T, fortime; and vertical or ordinate, R, for price ratio. Let the equation forthe best-fitting line beR=λT+μ,  1.where λ is the slope of the line and μ is the R-intercept. Onedefinition of the best-fitting line is the line defined by values of λand μ for which the root-mean-square of the vertical scatter of pointsis minimized. This occurs when$M = {\sum\limits_{n = 1}^{N}\quad\left( {R_{n} - r_{n}} \right)^{2}}$is minimized with respect to λ and μ, whereR _(n) =λt _(n)+μ.  3.

By a simple application of the calculus of variations, λ and μ aredefined by a pair of linear equations:C=λE+μF  4.andD=λF+Nμ  5.andC=Σt_(n)r_(n), D=Σr_(n), E=Σt_(n) ², and F=Σt_(n).  6.

This pair of equations linear in both variables is readily and uniquelysolved as:λ=[NC−FD]/[EN−F ²]  7.andμ=[ED−FC]/[EN−F ²]  8.

By the Schwarz inequality, EN is always greater than F², except for thedegenerate case when all the t_(n) are equal. In the general case, thebest-fitting line is unique. In the degenerate case, which is irrelevantfor our purposes, the line may be indeterminate.

If the N points are weighted by positive factors. w_(n), n=1, 2, . . . ,N, because the trades are not all the same size, the same procedureyields a more general result:

with new parameters,C′=Σw_(n)t_(n)r_(n), D′=Σw_(n)r_(n), E′=Σw_(n)t_(n) ², F′=Σw_(n)t_(n),G′=Σw_(n)  9.the best-fitting line has slope λ and R-intercept μλ=[G′C′−F′D′]/[E′G′−F′ ² ], μ=[E′D′−F′C′]/[E′G′−F′ ²]  10.

Best-Fitting Higher Order Curves. Except for a degenerate case of nopractical importance for our purposes, a unique polynomial of degree Ncan be found that passes through N points, (t_(n),r_(n)), n=1, 2, . . .,N. In principal we have a perfect-fitting curve for any scatter diagramwith N points. This is a generalization of the N=2 statement that aunique straight line passes through 2 given points, or if N=3, there isa conic section passing through four or three given points, depending onwhether it is quadratic in both variables t and r or only in t alone.But this approach seems impractical as the following example shows.

Start with any fourth degree polynomial with all real and differentroots at times, t₁, t₂, t₃, t₄:${{\mathbb{d}f}\quad{(t)/{\mathbb{d}t}}} = {{f^{\prime}\quad(t)} = {{\left( {t - t_{1}} \right)\quad\left( {t - t_{2}} \right)\quad\left( {t - t_{3}} \right)\quad\left( {t - t_{4}} \right)} = {\sum\limits_{i = 0}^{4}\quad{a_{i}\quad t^{i}}}}}$where f′(t) is the “derivative” of a function f(t) in the mathematicalsense, not in the financial sense. Multiplying the polynomial out in(11) and integrating it, as we used to do in first year calculus, forsome real numbers a₁, i=0 to 4, we have a fifth degree polynomial withtwo maxima at t₁ and t₃, and two minima at t₂ and t₄:$R = {{f\quad(t)} = {\sum\limits_{i = 1}^{5}\quad{a_{i - 1}\quad{t^{i}/{i.}}}}}$

It is not hard to show that there are an infinite number of straightlines with different values of λ and μ which intersect this curve atfive different points. The fifth degree polynomial which passes throughfive of those collinear intersection points (or points very close tothem, close enough so that for all practical purposes the points appearto lie on a straight line) is unique and must be the original fifthdegree polynomial in eq. 12. From this example we can conclude thefollowing, well-known to practitioners who have done extensiveapproximating of curves by polynomials: Fitting a high degree curvethrough points very close to a straight line will produce maxima andminima not at all respectful of the appearance of almost no scatter ofthe original points from a straight line.

If a scatter diagram suggests there should be one or two inflectionpoints (changing from increasing to decreasing once or twice), fitting asecond or third degree curve may handle some kinds of inflection pointsbetter than two or three straight lines in the sense that points off thecurve near the inflection point may be more reasonably classified as towhether they are off the best fitting smooth curve of degree two orthree by enough vertical distance to change the applicable fee fortiming. This nicety could certainly be looked at in a preliminary studyof the best rules for judging the effects of market timing and settingfees accordingly. It is hard to believe that any approximating curvegreater than degree three would be of value, but this possibility shouldnot be totally dismissed.

Best Fitting Parabola. As mentioned earlier, neither one of two adjacentbest fitting line segments with different slopes may approximatetransaction prices near their point of intersection (inflection point).In many cases, there is a family of parabolas (all with vertical axes)that have the same slope as each of the adjacent lines at the uniquepoint where they touch each line. One of the family will be the bestfitting parabola for all transaction points between the two points oftangency. We present here the formulas for calculating the family ofparabolas and for choosing the best fitting. Using the same notation aspreviously, let the two adjacent best-fitting lines in the t,r plane ber=λ ₁ t+μ ₁, and r=λ ₂ t+μ ₂  (13)and the best fitting parabola described by three parameters r₀, a, andt₀,r−r ₀ =a(t−t ₀)².  (14)

The requirement that the parabola is tangent to the first line at apoint t₁ and to the second line at a point t₂, where 0<t₁<t₀<t₂, andintersects the lines at no other points, determines the points (t₁,r₁)and (t₂,r₂) in terms of the known parameters defining the two lines andthe parameter a, as follows:t ₁=(λ₁−λ₂)/4a+(μ₁−μ₂)/(λ₂−λ₁)  (15)t ₂=(λ₂−λ₁)/4a+(μ₁−μ₂)/(λ₂−λ₁)  (16)r ₁=λ₁ t ₁+μ₁, and r ₂=λ₂ t ₂+μ₂,  (17)where if λ₂>λ₁, then a>0, and if λ₂<λ₁, then a<0.

As a check, in the symmetric case, where λ₂=−λ₁, then r₁=r₂ and

r₀=r₁+λ²/4a. The parabola opens upward if a is positive and downward ifa is negative, as it should.

In the general case, the horizontal distance occupied by the parabolicsegmentt ₂ −t ₁=(λ₂−λ₁)/2a  (18)increases monotonically and the parabola becomes progressively flatteras the parameter, a, increases from 0 to plus infinity, opening upward,or minus infinity, opening downward.

The system computer can, once again effectively instantaneously,calculate the vertical separation of the transaction price points in thevariable time interval where the parabola is the best fitting segment inthe root-mean-square sense we have used in Equation 2, with weightingsto correct for transaction size variations as before. It will by thismeans find the value of “a” which minimizes this RMS separation, andaccordingly is the unique best fitting parabola.

Stated differently, what is disclosed is a method for use by buyers andsellers in the execution of trades, each trade defining a respectiveprice. In this method, prices of trades executed within the system arelogged and a trend line is derived therefrom. A trading fee for aparticular trade is determined, the fee imposed upon the buyer in theevent the respective price is below the trend line, the fee imposed uponthe seller in the event the respective price is above the trend line.The amount of the fee is functionally related to the difference betweenthe respective price and the trend line. Preferably the fee is in amonotonic increasing relationship with the magnitude of the difference,and is in a monotonically decreasing relationship with the size of theparticular trade.

Market Maker Relations

In keeping with the invention, sponsors of a marketplace system may wishto establish contractual relationships with dealers, which establish alarge number of them as authorized dealers. To become an authorizeddealer for an item, a reliable, adequately capitalized individual ororganization with knowledge of how a dealer operation functions andprepared to meet audited account-keeping standards, must agree that:

-   -   it will make a good market in that item and endeavor to make the        best possible market according to the guidelines of the system        on how the excellence of market making is to be measured by the        system, based on features (a), (b), and (c) mentioned above. In        particular, the authorized dealer, for the most part, must quote        spreads that are smaller than those quoted in the same item at        the same time by dealers in competitive marketplaces.    -   it will not buy or sell the item in any manner except through        the sponsors' system, including abiding by all the rules of the        system, and in particular will promptly, fully, and accurately        report every transaction in the item according to system rules.

It should be noted that when an authorized dealer has a transaction withits customer, the customer may not be obligated to report, but thedealer is still obligated to do so. In this way the system and itssponsors, in principle, know the holdings of its dealers as up-to-dateas the last trade report.

To compensate authorized dealers for loss of revenue from quotingsmaller spreads than those quoted by dealers in the same item in othercompetitive marketplaces, the system sponsors must establish an adequatecompensation arrangement.

Market makers in every market seek some kind of a balance betweenmaximizing their own profits (transaction by transaction) and providingthe transaction as a service to the customer at a lower customer cost.The larger the spread the more profit the market maker receives on eachtrade that is consummated, and at the same time the fewer the quotesaccepted by the customer. The market maker who takes too big a piece ofthe pie gets less business from the customer. If all else stays thesame, there is some theoretical balance point at which the market makermaximizes his profit. Since all else does not stay the same, there is akind of dynamic equilibrium among all dealers around the balance point.The market maker, utilizing his sense of, or feel for, the market andthe information provided by his customers, perpetually seeks spreadsunder varying conditions which maximize his profits. Some market makersfrom time to time take a different tack and operate with wider spreads,not making so many trades, making more money on each one and not workingso hard. This approach works particularly well in the short term andwith new customers. A market maker can rest on an already achievedreputation for small spreads for a while and his business may not falloff much. In any marketplace, among market makers seeking the balancepoint that maximizes their profits, some are further from that pointthan others. A small stream of dissatisfied customers continually leavesthis marketplace, while another stream of hopeful customers, generallywith somewhat different total volume, may enter it, bringing with themtheir trading volume previously carried by other competitivemarketplaces. The only thing that can offer market makers an incentiveto lower spreads below those which give them the transaction profit theyseek is some kind of financial compensation. Two of these were discussedabove:

-   -   (1) The fortuitous timing fee. The dealer with wide spreads        around the trend curve approximating the scatter of transaction        prices (as illustrated in FIGS. 1 and 2) more frequently sells        higher and buys lower, and therefore is penalized by the        fortuitous market timing fee more frequently than the more        efficient dealer with narrower spreads who trades closer to the        trend curve.    -   (2) A characteristic of such marketplace systems is that their        sponsors, in contrast to older marketplace systems, will        generally have and use the full power, speed, and bandwidth of        modern computer networks. Their users will have the added        efficiency of lower hardware, communication, and network costs.        These savings may be passed on to all users including market        makers, who thus may have cost advantages over market makers in        competitive markets.

Still, it is desired to virtually guarantee that the system will be themost efficient, so more must be done.

System sponsors must use the method that rewards efficient risk-takerswho provide market liquidity and eliminate the market maker'straditional method of maximizing revenues from market making itself. Theonly way they can do that is to somehow measure the performance of theirauthorized dealers as efficient market makers in a way that is fair,transparent, and acceptable to all users. Quantitatively measuring amarket maker's performance cannot be done in a satisfactory way withoutcomplete, accurate trade-by-trade transaction reporting. The width ofthe spread does not measure the efficiency of a dealer without otherinformation. When the risk is higher because of market conditions, awider spread is justified and should not be penalized. The inventionrequires the system itself to calculate for each transaction between acustomer and an authorized dealer, and for each authorized dealer in theitem at the time of the transaction, the (1) unit price difference and(2) the money value difference (size times unit price) between thetransaction and (case a) if the transaction is a customer purchase, allhigher offers quoted by authorized dealers in the item, just prior tothe transaction, or (case b) if the transaction is a customer sale, alllower bids quoted by authorized dealers in the item, just prior to thetransaction.

The formulas, (1) and (2), are direct measures of the inefficiencyfoisted on the marketplace by dealers whose spreads are too wide.

To best utilize this data, authorized dealers should be separated intoclasses depending on their size. The sponsors should initially separateauthorized dealers into Classes, I, II, III, etc., by the minimum amountof liquid capital (available for trading and segregated from all otherassets) that the authorized dealer must have. Note that dealers'classifications may vary from item to item. A dealer may be in Class Ifor one item and class II for another, but most authorized dealers willprobably be in the same class for most items. At the end of the firstoperating quarter or other initial period of operation, when tradingvolumes of authorized dealers are available in each item, these volumesmay also have to meet minimum requirements for a dealer to remain in itsclass. Class I has the highest requirement for liquid capital andtrading volume, Class II has a smaller capital and trading volumerequirement, etc. In a very large market like international currencytrading, with trade sizes as large as $1 billion or more and as small as$10,000 or less, there might be as many as ten or more classes. Class Imight require three or four times the capital and trading volume thatClass II required; Class II three or four times as much as Class III,and so on (using the same three or four ratio each time) right down toClass X (ten), requiring about five orders of magnitude smaller requiredcapital and trading volume. The largest, most successful and inevitablymost prestigious authorized dealers would be in the lowest category (1)for most if not all the items they deal with. Dealers form vertical“chains” so that if a customer wants a quote (e.g. in a particular classbetween 1 and 10) so that dealers within a particular chain would referthe order up or down to a dealer capable of handling that size. The goalis that chains will compete with each other, yielding efficiency.Dealers might also normally be prohibited from giving quotes and makingtrades in size above a certain maximum size, which maximum might belower, by a factor of three or four, than the quote size maximum for thenext lower class. Depending on performance over time, authorized dealersmay be reclassified as necessary, and new authorized dealers may begiven a grace period in their initial class assignment, and with arequirement initially only on liquid capital, not on volume.

Authorized market-makers in an item are financially motivated to competeagainst other authorized market-makers in that item, by being evaluatedon their performance on each transaction of the item taking place on thesystem by a system feature: If it is a sale by a non-market-maker user,the central computer(s) keep track of the bids of all the authorizedmarket-makers at the time of the transaction, and if it is a purchase,the computer keeps track of the offers. In both cases the competingmarket-makers get penalty points depending on how close their bids oroffers were to the winning quote. Considering the case of a customersale, the market-makers who had the same bid as the market-maker whobought the item, are awarded zero penalty points. Those with lower bidsget more penalty points depending on how far they were from thetransacted bid, with maximum penalty going to a market-maker who had nobid showing at the time of the transaction. In the case of a customerpurchase, the market-makers who had the same offer as the one who soldthe item, are awarded zero penalty points. Those with higher offers getmore penalty points depending on how far they were from the transactedoffer, with maximum penalty going to a market-maker who had no offershowing at the time of the transaction. Market-makers must only beexpected to compete against other market-makers who are in their sameclass, where the class is defined by the range of transaction volume,such as the volume ranges illustrated in Table 4. The scale of thepenalty points may depend on the volume of the trade. i.e. larger forlarger trades, and may be different for different items, i.e. more foreasy-to-trade items.

Periodically, perhaps monthly or quarterly, the points that eachmarket-maker received during the period for all the items and all thesize classes that that market-maker is by its contract with the systemsponsor(s) authorized and required to participate in are aggregated(collected and totaled) by the system computer. Sponsor(s) must thengive bonuses to market-makers depending on their point scores. Thelowest penalty point scorer receives the largest bonus, the secondlowest gets the second largest, etc.

The bonus has to equal in motivational strength the desire for eachmarket-maker to bring in more profits for itself by having wide spreadsand must be competitive with marketplaces that do not have thisincentive. Most of the market-makers on the system should getsubstantial bonuses. Very few should get no bonus, perhaps only thosewho are expected to resign—with resignation procedure conforming tomarket-makers' agreements with sponsors. When the sponsors' marketplacebecomes dominant in the item trading volume with respect to allmarketplaces, the natural efficiencies of the largest market will easilyprovide adequate capital for compensating the best dealers by these orsimilar formulas. Until then, the amounts the dealers should receive asbonuses may perhaps have to be in part, in the form of notes, stockoptions, or similar paper.

Without this invention, in any of today's large active markets in bonds,stocks or currencies, there are inefficiencies because of normal dealeracquisitiveness (a.k.a. “greed”), which are hard if not impossible toweed out because there is no way, other than by use of this invention,to measure dealer efficiency fairly, promptly, and inexpensively. Ifwise choices are made by the sponsors for bonus amounts, properlyadministered, the Plan, then will inevitably give the sponsors' systemthe largest market share among marketplaces competing item by item.

In the trend that began in the last few years where market-makers arebeing dis-intermediated in many financial marketplaces, any sponsor of amarket-place system should consider operating without market-makers orwith a minimal number of market-makers. This can be done by sponsor(s)or their agents reviewing the situation in each item and each sizeclass, item by item, size class by size class, and making decisions toeliminate market-makers where customer order flow makes it possible tooperate without market-makers, or to reduce their number to a very fewwith little competition, right down to a single trusted market-makerwithout competitors. In the case of a marketplace system linking centralbanks, it will probably be necessary to have only one market-maker ineach currency that is an item of the marketplace system, say currency Yin exchange with the central bank's own currency X, if the central bankof Y is also a sponsor of a system. In that case each central bank X andY should have a market-maker, and the two negotiate the X/Y exchangeratio, more or less continuously.

Crisis Fees

In a marketplace system for national central banks linking one or morecentral banks to each other and/or to customers, including financialinstitutions and organizations, corporations, government agencies,brokers, exchanges, dealers, individuals, and others who desire tosell/buy currencies, options, futures and other financial instrumentsdenominated in the central banks' currencies, the sponsor(s) willgenerally be one or more central banks who along with the customers willbe users of the system. Such central bank systems will benefit from thetiming fees and market maker evaluation methods described above, butfurther benefit from the imposition of so-called “crisis fees.”

Central banks may have to withstand a run on their own currencies of thenature of a speculative bear market raid, where the central bank ornational authorities feel forced to sell their currencies at droppingprices or buy them again at higher prices, in order to protect theirnational financial systems. Either way at the end of the crisis thecountry can wind up with its currency greatly devalued as many recentexamples illustrate. Crisis fees are charged only to users selling afalling currency (and thus buying a rising currency). The crisis isbenchmarked by the price of other currencies not under attack risingwith respect to the falling currency of the central bank. A crisis isoften marked by rapid increases in (1) transaction volume and (2) price.These effects are measured by formulas for (1) gross volume oftransactions in a time segment (not generally having the same durationas the time segments for calculating fortuitous market timing fees) and(2) the slope of the best-fitting straight line in a time segment,calculated with the volume of each transaction linearly proportional to,i.e., equal, to its weighting (unlike Table 2, where the weighting risesroughly logarithmically as the volume increases). The magnitudes ofthese two criteria when each exceeds an established threshold, aremeasures of the current severity of the crisis, and the time integrals(in the mathematical sense of integral calculus) of these magnitudes aremeasures of the total severity of the crisis from the beginning (whenthe magnitudes first exceeded the established thresholds) to the currenttime. Formulas and algorithms for the calculation of these magnitudes,their threshold values, and their time integrals are included in thesoftware by which the system is controlled. Because of the importance ofthe immediate moment and the crossing of threshold values, time segmentsbegin with each new threshold value and end at every trade. Unlike thetime segments of the fortuitous market timing fee, there are thennumerous overlapping time segments under evaluation. Users should beinformed of the size of the current crisis fee applicable to atransaction before a user executes the transaction. Indeed preferablyeveryone on the system would be informed on a continuous basis of thesize of the current crisis fee. This is entirely different from themarket timing fee which should only be considered beneficial to the userif it is noticed at all.

With respect to bear raids for which we have historical data, althoughthere may be long precursors indicating a weakening of the currency thatultimately comes under attack, the raid itself largely takes place in ashort time interval. There is no guarantee that this will always be thecase. Indeed the very existence of crisis fees may slow down an ensuingraid so that a crisis is protracted enough so that it does not seem tobe taking place. A “slow” raid in fact is far less devastatinghistorically than rapid raids because the extra time can be used toprotect the falling currency by conventional means, such as arranginglines of credit or collateralized loans. Primarily because of this“slow” raid possibility, we believe it would be unnecessarily risky torely on a fixed computer algorithm to determine the moments forintroducing or for changing crisis fees. Instead the system computerswill give the system managers various presentations of data in the mostmeaningful and immediately useful form for helping them, together withthe sponsor(s), judge the severity of the situation. This data willinclude among other things, in time segments as described above: (1)when threshold values have been exceeded and by how much, (2) upside anddownside incremental size and (3) and upside momentum. Parameters arethen available to the sponsors to be selected under the conditionsprevailing at crisis time so that system managers who have become veryfamiliar with this type of data by extensive training, planning, andrehearsing, are in a well informed position and fully understand how todetermine and adjust crisis fee levels to protect a central bank bysignificantly reducing the frequency, speed and magnitude of suchdevaluations.

If the teachings detailed above have been properly followed, then untilthe onset of a crisis, central bank X will have close to 100% marketshare of all currencies it exchanges for its X currency with oneexception. Market share of currency exchanges of another central bank,say Y, that participates in a multi-central bank system with X, must besplit between X and Y, on an agreed basis, say 50—50. Together theywould still have nearly 100% market share. For this reason, it will bevery difficult for any speculators or other major players in currency Xto begin a bear raid. At the critical time when a raid might otherwisehave begun, there will be no other marketplaces where there are X buyersor sellers of significant size poised to launch a raid.

Assuming the system controls the market for currency X, crisis fee ratescan be, hypothetically, set so high that the system would virtually haltall trading in X. At the other extreme, crisis fees can be set at zeroso that they have no effect on trading. Somewhere between the two is abroad range of parameter choices where the system will work well tobring in crisis revenues for the benefit of the central bank and thenation and also at the same time moderate the crisis. Fees should be setso that the price of stable currencies Y do rise with respect to X, butthe increase is slower and the price swing significantly less than itwould have been without the crisis fee. Crisis fees need never stoptrading altogether to accomplish this result.

As described herein, the sponsors of any system utilizing this inventionseem required to make choices. If they intend to favor or discouragetransactions depending on transaction purposes, they should define thepurposes by categories and make choices of the degree to which they areto be favored or discouraged, such as illustrated in Table 5. If theyintend to derive revenue from fee charges for market timing, they mustarrange to set various parameter values that determine these fees and inparticular for stabilizing markets in a way that also increases fees. Itis anticipated that sponsors will determine such purposes and parametersin broad outline, and then authorize managers to make the day-to-daychoices of parameter values within guidelines that the authorizationsset forth.

Managers with hands-on day-to-day experience over time will become veryadept at setting parameter values that make the market run smoothly andproduce substantial revenue in the process. Any and all parameter valueswill be embedded in software and will be readily adjustable withinseconds by experienced and authorized managers.

Extension of systems from a first country to additional countries. Manycentral banks are in a position to initiate a system in which they, asthe lead country, either entirely on their own or accompanied by sometrading partner central banks, (usually “few” trading partner centralbanks, but if the lead central bank has a dominant currency, it could be“many” trading partner central banks) can fully justify sponsoring astate-of-the-art intranet foreign exchange marketplace system. Such asystem starts with the lead country knowing that it can initiallycontrol the price variability of its currency, because the country hasan existing controlled, non-convertible currency, or, in connection withsponsoring a system, it takes the initiative and issues a new“international” currency, or because, with its participating tradingpartners it is assured that the initial foreign exchange rate pairs willbe stable. Countries which might consider joining the system operated bythe lead country may have strong incentive to do so based on evidenceoffered by the lead country that its trade with the lead country andother countries expected to join the lead country's system will increasesubstantially and profitably thereby.

Then proper use of an appropriate combination (or all) of the techniquesdiscussed above will make sure that over the years the lead country'ssystem retains that control, as it becomes an increasingly importantplayer on the international scene, even ultimately with a dominantinternational currency, and as the amount of its currency held byforeigners grows rapidly, while its own currency reserve grows much moreslowly. Throughout this process the sponsor or sponsors' system alwaysremains pre-eminent with close to 100% market share. No othermarketplace can compete with it if it uses the above-mentioned methodswisely.

As the stability and growth potential of its currency becomes clearer,new countries will wish to participate in its system. The country of thelead central bank can offer these newcomers a partnership with networknodes in their country's financial capital and other major cities,carrying the new partner country's trading data on the lead country'ssystem network, and integrating the new data into its varioustransaction and quotation displays and reports. If it wishes to becompletely egalitarian, the lead central bank can agree to share systemfees equitably with each participating country central bank and toaccept the voice of the partner country central bank as equal in weightto its own in setting system operating parameters and other sponsorpolicies. Even if it goes to this egalitarian extreme, which of courseit need not do, it retains the advantage that it defined the initialsystem to meet its own needs and preferences.

Let X_(cbn) be the reserves of the lead central bank at various times,generally years apart and indexed as n=0, 1, 2, . . . , where t₀ (n is0) is at the start of the system, and the larger n, the greater the timeelapsed since the start of the system (i.e., t_(n+1)>t_(n), for all n).Let X_(fn) be the amount of the currency of the lead central bank in thehands of foreigners at the same times n=0, 1, 2, . . . Then at n=0,X_(fn)=0 or is relatively small. If the lead central bank's sponsoroperates in the manner described above, then at some point in time, saywhen n=N, much more of its currency is in the hands of foreigners thanit carries as reserves. This is the optimum desirable and stablesituation. For when this is the case, the lead country's nationaltreasury has relatively little non-working funds (not invested in equityor interest bearing loans or bonds), while the rest of the world hasfully accepted its currency. Its seigniorage increases the value of itscurrency by perhaps 30%. This situation prevails only for mature, stablecurrencies. Realistically this maturity develops only over a period ofyears, where a sequence of the following relationships occur: X_(Cb0) isrelatively small,

-   First, X_(f0)=0; 0<X_(cb1)≈X_(f1);-   Next, X_(cb1)<X_(cb2)<X_(f2);-   Then, X_(cb2)<X_(cb3)<<X_(f3);-   and finally X_(cb3)<X_(cb4)<<<X_(f4); with N=4.

X_(cbN) has grown little compared to X_(cb0), but X_(f2) has grownenormously compared to X_(f0), perhaps a thousand time more.

The foregoing discusses preferred embodiments for the invention, but theinvention is not limited by the particular embodiments described above.Those skilled in the art will have no difficulty devising myriad obviousvariants and improvements of the invention, all of which are intended tofall within the scope of the claims which follow.

1. A trading system for use by buyers and sellers in the execution of trades, each trade defining a respective price, the system comprising: apparatus logging prices of trades executed within the system; apparatus deriving a trend line from said logged prices; apparatus determining a trading fee for a particular trade, said fee imposed upon the buyer in the event the respective price is below the trend line, said fee imposed upon the seller in the event the respective price is below the trend line; the amount of said fee functionally related to the difference between the respective price and the trend line.
 2. The system of claim 1 wherein the function further defines the fee in a monotonically increasing relationship with the size of the particular trade, almost independent of size.
 3. The system of claim 1 wherein the function further defines the fee to include a fixed amount.
 4. The system of claim 1 wherein the derivation of the trend line is weighted with the sizes of the trades.
 5. The system of claim 1 wherein the derivation of a trend line is with respect to a time segment that completely covers a trading day.
 6. The system of claim 1 wherein the derivation of a trend line is with respect to a time segment within which a preselected amount of trading has occurred.
 7. The system of claim 1 wherein the derivation of a trend line is with respect to a time segment within which a preselected amount of trading has occurred, or within which a preselected interval of time has passed, or the boundary between adjacent segments is adjusted for improving line-fit, or some combination of these three.
 8. The system of claim 1 wherein the function defines the fee in a monotonic increasing relationship with the magnitude of said difference.
 9. The system of claim 8 wherein the monotonic increasing relationship with the magnitude of said difference is capped at some predetermined magnitude.
 10. A method for use by buyers and sellers in the execution of trades, each trade defining a respective price, the method comprising: logging prices of trades executed within the system; deriving a trend line from said logged prices; determining a trading fee for a particular trade, said fee imposed upon the buyer in the event the respective price is below the trend line, said fee imposed upon the seller in the event the respective price is above the trend line; the amount of said fee functionally related to the difference between the respective price and the trend line.
 11. The method of claim 10 wherein the function further defines the fee in a monotonically increasing relationship with the size of the particular trade, almost independent of size.
 12. The method of claim 10 wherein the function further defines the fee to include a fixed amount.
 13. The method of claim 10 wherein the derivation of the trend line is weighted with the sizes of the trades.
 14. The method of claim 10 wherein the derivation of a trend line is with respect to a time segment that completely covers a trading day.
 15. The method of claim 10 wherein the derivation of a trend line is with respect to a time segment within which a preselected amount of trading has occurred.
 16. The method of claim 10 wherein the derivation of a trend line is with respect to a time segment within which a preselected amount of trading has occurred, or within which a preselected interval of time has passed, whichever occurs first.
 17. The method of claim 10 wherein the function defines the fee in a monotonic increasing relationship with the magnitude of said difference.
 18. The method of claim 11 wherein the monotonic increasing relationship with the magnitude of said difference is capped at some predetermined magnitude.
 19. A method of evaluating a market maker in a trading system in which trades take place, the market maker posting offered bid/ask prices for trades from time to time, the market maker having an associated trading volume, the method comprising: logging prices of trades executed within the system; for each particular trade having an actual price and for which the market maker is contemporaneously offering a bid/ask price, noting the respective difference between the price offered by the market maker for the trade and the actual price; summing the magnitudes of the respective differences yielding a sum; and imposing a penalty upon the market maker as a function of the summed magnitudes.
 20. The method of claim 19, further characterized in that for each particular trade for which the market maker is not offering a price contemporaneously with a particular trade having its actual price, adding to the sum an amount bearing predetermined relation to the particular trade.
 21. The method of claim 20 in which the predetermined relation is a predetermined fraction of a unit price for the particular trade.
 22. A method for trading of rising and falling currencies, said trading performed with respect to trades made by traders, the method practiced with respect to a particular currency, the method comprising the steps of: logging the gross value of transactions for the particular currency in a time segment; deriving a trend slope for transactions for the particular currency in a time segment; and at times when the gross value of transactions for the particular currency exceeds a first predetermined limit and the trend slope for the particular currency is negative and exceeds a second negative limit, imposing a fee upon traders who are selling the particular currency and thus are buying a currency that is not the particular currency.
 23. A first method for operation of a currency trading system with respect to a first currency of a first country, said first method comprising the steps of: establishing the currency trading system within the first country, said system employing a second method for use by buyers and sellers in the execution of trades, each trade defining a respective price, the second method comprising: logging prices of trades executed within the system; deriving a trend line from said logged prices; determining a trading fee for a particular trade, said fee imposed upon the buyer in the event the respective price is below the trend line, said fee imposed upon the seller in the event the respective price is above the trend line; the amount of said fee functionally related to the difference between the respective price and the trend line; establishing within a second country a trading node of the currency trading system; and sharing with the second country the trading fee.
 24. The first method of claim 23 further characterized in that the trading system employs a third method, said third method evaluating a market maker in a trading system in which trades take place, the market maker posting offered prices for trades from time to time, the market maker having an associated trading volume, the third method comprising: logging prices of trades executed within the system; deriving a trend line from said logged prices; for each particular trade having an actual price and for which the market maker is contemporaneously offering a price, noting the respective difference between the price offered by the market maker for the trade and the actual price; and summing the magnitudes of the respective differences yielding a sum.
 25. The first method of claim 23 further characterized in that the trading system employs a fourth method, said fourth method performed with respect to trading of rising and falling currencies, said trading performed with respect to trades made by traders, the fourth method practiced with respect to a particular currency, the fourth method comprising the steps of: logging the gross value of transactions for the particular currency in a time segment; deriving a trend slope for transactions for the particular currency in a time segment; and at times when the gross value of transactions for the particular currency exceeds a first predetermined limit and the trend slope for the particular currency is negative and exceeds a second negative limit, imposing a fee upon traders who are selling the particular currency and thus are buying a currency that is not the particular currency.
 26. A method of evaluating market makers in a trading system in which trades take place, the market makers posting offered prices for trades from time to time, the market makers having an associated trading volume, the method comprising: logging prices of trades executed within the system; for each particular trade having an actual price and for which the market makers are contemporaneously offering prices, noting the rankings of the market makers according to each respective difference between the price offered by respective ones of the market makers for the trade and the actual price; and aggregating the rankings.
 27. A method of evaluating market makers in a trading system in which trades take place, the market makers posting offered prices for trades from time to time, the market makers having an associated trading volume, the method comprising: logging prices of trades executed within the system; for each particular trade having an actual price and for which the market makers are contemporaneously offering prices, noting the positions of the market makers according to each respective difference between the price offered by respective ones of the market makers for the trade and the actual price; and assigning penalties to respective market makers as a function of the positions of the respective market makers. 